If you'll indulge me, I'd like to perform a little thought experiment. Let's say there's three businesses, all in one hypothetical American state. Let's for argument's sake use Michigan. Each of these three businesses revolves around beer: one brews the beer, one distributes the beer, and one retails the beer. Each of these is a small business, and let's say each of these beer companies is run by one person. So three companies, three people, three jobs in total, all in one state (Michigan). Now this isn't all that important, but let's assume the economics to make a 6 pack look something like this:
The important part about this is that strictly speaking, there are "trade deficits" and "trade surpluses" for each part of this supply chain. The Distributor has a "trade deficit" with the Brewer, since he only buys from the Brewer, but doesn't sell to him, and the Retailer has a trade deficit with the Distributor, since he similarly only buys from the Distributor but doesn't sell to him. But, since the Distributor buys from the Brewer and sells to the Retailer, he has two relationships while the others only have one. Thus, the "trade flows" in this case look like this:
The Trade Outflows represent what each party pays the other party to acquire their inventory (otherwise known as the buyer's Cost of Goods Sold, or "COGS"). The Trade Inflows represent what each party receives from each other respective party when they sell their portion of the supply chain (this is the same thing as their "revenues"). As you can see from the table above, despite each of these three companies making the same in profit, both the Brewer and the Distributor, if we were thinking about each part of this ecosystem as a country, have a "trade surplus" while the retailer runs a "trade deficit."
Now, assuming that there's other people in Michigan who actually want to drink this beer, and thus people actually buy it, is there anything wrong with the above picture? After all, each business gainfully employs a worker (in this case one entrepreneur each), each of whom makes the same dollar profit when a six pack is sold. The answer seems to be "No", there's nothing wrong with the above situation, despite the fact that this little ecosystem runs both "trade deficits" and "trade surpluses" within itself.
Now you might point out that the total surpluses and deficits add up to zero, and thus, the whole ecosystem does not run a trade deficit. And you'd be right. Additionally, because all three businesses are located in Michigan, Michigan doesn't run a trade deficit or surplus either.
So now let's modify this little thought experiment for a second and say that the Brewer decides to move to Ohio. Nothing else changes in the beer ecosystem, except the Brewer now brews his beer in Ohio, and thus the Distributor has to ship the beer across state lines to the Retailer in Michigan. In this case, Ohio would now have a $2.50 trade surplus with Michigan, and Michigan would have a $2.50 trade deficit with Ohio. Is there anything wrong with this? The answer again is No. All three people running each of these three businesses remains employed, and the beer is still flowing. It's true that Michigan has lost a job and Ohio has gained a job, but because they're both in the United States, we seem to ultimately tolerate it.
Let's now take the experiment one step further, and now we're going to have the Brewer move from Ohio to Mexico, where he'll continue brewing the beer there. Changing nothing else, the Distributor will continue to buy the beer from him and then sell it to the Retailer in Michigan. In this case now, Ohio, which is in the United States, has been replaced by Mexico, which is not. Michigan's trade deficit with Ohio has now become Michigan's trade deficit with Mexico. And since Michigan is in the United States, the United States is now running a trade deficit with Mexico. Additionally, since the United States and Mexico don't use the same currency, this latest change also has the new effect of resulting in the distributor having to sell U.S. dollars to buy Mexican Pesos, thus in theory putting downward pressure on the American national currency (this of course didn't happen in the previous example because Michigan and Ohio don't have state-specific currencies, and both use the dollar).
Most businesses have supply chains that are just like the dynamics with the beer ecosystem above. The specialization most modern day supply chains have results in each part of them running "trade deficits" and "trade surpluses" with the other parts. This thought experiment gives us some insight then into the important but slippery logic of trade and trade deficits: we only really only seem to care about them when they are national trade deficits. When it comes to trade deficits within companies or between states, we seem to be more more tolerant of.
But why is this the case? Why should the people in Michigan care if the beer they drink is brewed in Ohio compared to if it's brewed in Mexico?
The answer is because in the real world, what often happens is our hypothetical Brewer moves to Ohio for a good business reason. Maybe it's because he can brew the beer cheaper there, or maybe because he pays lower taxes on the profits he makes. But what also happens in this case is that businesses (including beer businesses) are not one person businesses. Our beer brewer usually employs multiple people, and when he picks up and moves his business to Ohio, often times all of his workers in Michigan don't necessarily go with him. This creates unemployment in Michigan and creates new jobs in Ohio, to the detriment of Michigan, and to the detriment of Ohio.
In the third example, where the Brewer has moved his business to Mexico, workers from Ohio cannot easily up and move to Mexico to keep their jobs. Thus, America has now likely lost jobs to Mexico. This is why we care about national trade deficits then: lost American jobs. We can stomach when one state loses jobs to another state, since most of us can theoretically pick up and move to that other American state. When the question becomes one of Americans losing their job to another country, however, we care much more, at least partially because we can't easily up and move to that other country to maintain our employment.
So the question then becomes, has increased trade between America and the rest of the world like the kind we discussed in the beer ecosystem above actually led to a "hollowing out" of the middle class, and a permanent loss in jobs? While it gets a little complicated, the answer again is No.
Below is a chart showing American Net Exports of Goods and Services since 1947. This effectively serves as a measure of the country's trade deficits (or surpluses) with the rest of the world. If the blue line is above the 0 line, that indicates America is running a trade surplus (meaning we sell more to the rest of the world than we buy from it), and a line below the 0 mark indicates a trade deficit (where we buy more from the rest of the world than we sell to it). As you can see from the first chart, the line essentially hovers around zero until about 1975, where the US starts to run modest trade deficits. This picks up steam in the mid 1990's in dollar terms, and then accelerates in a big away all throughout the 2000's. This has continued further Post-COVID.
It's a better idea to look at this as a percentage of our GDP though, since $100 billion of trade in 1995 was a much bigger number in real terms and in relation to the economy than it is today. When you look at our trade situation this way, you can see that trade deficits as a percentage of total American output actually started to really pick up in the 1980's (so earlier than what the chart above indicated), only to actually "recover" some in the 90's and then re-accelerate again in the late 90's and 2000's. Since then they've decreased somewhat, but our trade deficit with the world still remains significantly greater than where it was in let's say, 1970.
The first question to ask is why is this happening? Why did America all of a sudden start running big trade deficits in the late 1970s, and why did those trade deficits get bigger in the ensuing decades?
Two likely reasons. First, even before the Cold War ended and the Soviet Union collapsed, more and more countries around the world adopted some version of a liberal democratic political model and a capitalist (or at least semi-capitalist) economic model. Nixon going to China in 1972 was a good example of this, which not only helped thaw relations between the U.S. and China, but also resulted in China being opened up to the world in a major way over the course of the next decade. This ultimately helped open China up to trade with both the US and the rest of the world too. The growth of liberal democracy was aided and abetted by American led "free trade" agreements, and produced substantial growth in these new, developing nations. As these new nations became more business friendly and viable for investment, capital and production flowed there as a result.
Now, this is often depicted as the source of all of the American middle class's biggest miseries. Good paying jobs are being shipped overseas to other countries (particularly China) where workers there will work for a dollar a day, leaving American workers unemployed, and those that are able to keep their jobs with lower wages at worst or stagnant wages at best. This is the story that has been beaten and battered into our brains as long as I've been alive.
If that was true, however, then one of two things (or both) should have happened: first, as our trade deficits with the world have seemingly exploded, unemployment should have skyrocketed as a result. Two, as our trade and trade deficits with the world expanded, our wages and incomes should have stagnated (a fancy economic term for "grow slowly") and grown more slowly than prices. But has either one actually happened? Let's take unemployment first.
Below is a chart of American unemployment over the same period, overlayed with our trade deficit as a share of GDP.
What you'll notice here is that with the exception of the Great Financial Crisis and COVID, unemployment even during recessions has not actually been significantly higher during the era of "Globalization". Actually what's happened is that during recessions, our trade deficit with the rest of the world tends to shrink some (at least as a percentage of GDP). But more importantly is that during the era of globalization, again, allegedly the root of the great hollowing out of the American middle class, unemployment has reached unprecedented low levels. In 2000, for example, when the American trade deficit with the rest of the world was the largest it had ever been to that point, unemployment was at 4%. It hadn't reached that level since the mid 1950's, when the trade deficit was actually a surplus. The same was true in 2019. America's trade deficit with the rest of the world was still very significant, yet unemployment fell to an even lower level of 3.5%. Then even after COVID, when our trade deficits remained robust with the rest of the world, unemployment for the better part of 2022 and 2023, and a good chunk of 2024 remained below 4%. Americans have seen very low unemployment then in times of trade surpluses and deficits. Trade deficits alone then don't necessarily lead to structurally higher long-term unemployment. They may have even reduced it.
In our example above, when the Brewer moved his operation from Ohio to Mexico, American workers likely lost jobs. Why hasn't that happened in the case of America during the era of globalization?
For two very important reasons: first, because Americans are an industrious, resilient, and resourceful people, and we are quite good at coming up with new solutions to problems to make people's lives better. What tends to happen then is when our Brewer moved his operation to Mexico, his profit margin probably went up. But what he often does after that is to take some of those profits and start another business, or to invest in someone else who is starting another business themselves. This new enterprise then hires the displaced workers from the old Ohio brewery, and everyone is made whole again. This new investment back into the US also requires new dollars to be purchased, which restores strength in the U.S. Dollar and also helps keep interest rates down as well. While this probably reads like a rosy too-good-to-be-true fantasy tale, this has generally been the dynamic in America for at least the last 50 years, and it's why we've had low unemployment, low interest rates, and a stable currency throughout that period, despite meaningfully increased trade deficits with the rest of the world.
Except, another question remains: are the "new" jobs actually "good" jobs? Or are they low-paying, low quality jobs instead? Herein lies another strange conundrum about our current economic logic in America: in 2024, we apparently hate price inflation, yet we completely underappreciate the fact that our wages are growing as fast as they have since the late 1990's. But during the 2000's, and especially during the 2010's (two decades where globalization was particularly prominent), no one ever trumpeted how great it was that we had inflation that was actually too low. People often conveniently leave out this majorly positive aspect of globalization (this continues today). All people talked about then was how lackluster nominal wage growth was, as well as the fact that unemployment was way too high (in November of 2012, when President Obama was running for re-election, the unemployment rate was 7.7%, almost double what it is today). The goalposts were moved so that the negative narrative could retain its pole position.
In 2024 we have each of the latter two things (high wage growth and low unemployment), but we also have higher inflation, except yet again we seem to be choosing to look at the economy through a glass half empty lens, and making ourselves grumpy in turn. One would think that if high inflation were truly our concern, our focus would actually be on expanding free trade and globalization, since that is what helped keep inflation low in the previous two decades before. But instead we seem to be destined now to do the opposite.
Americans very well might have developed a habit of looking at the economy as Goldilocks did in the story with the Three Bears. Everything now is either too hot or too cold, even when it appears to be much closer to "just right." Rarely do we have an economy like we did in the late 1990's, where a unique technological advancement was driving wage growth high while globalization and the increased competition that came with it was keeping wages low. This allowed for very solid GDP growth and very solid real wage growth as well. Leaving the questions of whether or not AI is the next major advancement in productivity and whether it will reproduce 1990's-like real wage growth aside for the moment, the question of whether we will ever be able to be happy with the economy unless it's absolutely perfect represents perhaps our biggest national public relations issue. Even in late 2019, when the economy was in a great spot, Americans' confidence in the economy was about half of what it was in the 1990's (with the exception of a brief spike in February 2020 right before the pandemic).
Unfortunately though, this public relations problem may not be that at all. Instead, it may simply be that our views of the economy are another casualty of the return of greater political partisanship. In the week since the election, consumer sentiment from Republicans soared an incredible 30 points (see original source for the chart below here). While the stock market has dignified that view somewhat, the magnitude of that swing is a bit excessive, and probably to no one's surprise, this is the exact mirror of what happened following the 2020 election as well.
While the monster swings right around elections are the most obvious example of partisanship coloring our perceptions of the economy, notice also the huge gaps between Republican and Democratic sentiment during both the Trump and Biden Administrations. Despite a generally great economy under President Trump, most Democrats felt meaningfully less good about it than Republicans did. The reverse of course happened as soon as Biden was elected, and sentiment based on political ideology completely flipped, with the (huge) gap remaining for most of Biden's term.
Ultimately, the proper way to critique a modern economy is to look at two things: real wage growth (are wages growing faster than prices, and by how much?), and employment (it's no good to just have solid real wage growth if people aren't employed). We've dealt with the jobs question above already. Greater trade with the rest of the world ("Globalization") has not been a permanent job killer. So the next questions ask are: are wages actually lagging behind than prices? Are these jobs that have been created in place of those outsourced actually good, well paying jobs?
For at least the better part of the last 18 months, the answers to these questions are definitively "No" to the first, and "Yes" to the second. The chart below shows median hourly wage growth on a year-over-year basis compared to the CPI (also year-over-year). As you can see in the chart, wages have been growing faster than inflation for the vast majority of the last 30 years. In this particular data set, of the 332 months from March of 1997 to October of 2024, in only 59 of them (18%) were wages growing more slowly than prices. So 82% of the time then, American wages were at least keeping up with prices, but far more often than not, real incomes were growing, and standards of living were improving.
Also notice the large gap between wage growth and price inflation at the far right part of the chart (representing 2023 and 2024). As the chart below shows, which simply takes the data from the above graph and calculates a spread between the wage growth and price inflation, for the better part of the last two years now, real incomes have been growing very nicely. Said differently, wages have been growing faster than prices at very solid rates, and among the best rates over the last 30 years. And importantly, as readers of this blog will appreciate, this comes at a time when the CPI is likely significantly overstated because of the dynamics with shelter. If shelter inflation in the CPI were not so distorted, and better reflected economic reality on the ground, real wage growth over the last two years may have been some of the best in recent memory.
So all this is to say that no, American jobs today are not "low paying" and low quality. Some good, high-paying jobs may have been shipped overseas, but new, high quality and well-paying jobs were created in their place.
We undoubtedly had an awful, extremely messy time during 2020-22. No one debates that. But we have normalized from that now. Job growth over the last several years has been remarkable (even if it was initially overstated). Inflation is meaningfully lower than it was in the middle of the pandemic, and is now basically back to pre-pandemic rates, yet wage growth is still very solid at 4% and actually still above pre-pandemic levels. Isn't this exactly what we want? Though it isn't sexy to say it, the data suggest there is a very good argument to be made that there has never been a better time to be an American worker.
The most recent election clearly indicated that many, if not most, Americans disagree. Roughly 70% of the country thought that the American economy was "Not Good or Poor", and for those that did, 70% voted for President Trump. When presented with this data, Americans seem to always say the same thing: "that's not happening for me." This is a bit ironic of course since the whole is ultimately made up of its individual parts, so every individual cannot possibly be that miserable if the aggregate data is so good. This gap between "feel" and "real" has produced what became known as a "vibecession," which was significant enough to overwhelmingly elect President Trump again in this year's presidential election. As a result of this, we are back on the verge of employing a much more protectionist and anti-Free Trade policy under the Trump Administration, anchored of course by his propensity for tariffs.
To be sure, tariffs can serve a good purpose. If Trump and his economic team are using them simply because trade agreements have become too deferential to the rest of the world (an argument he made repeatedly in his first term), then using them as negotiating leverage to garner better terms is perfectly fine. But what is problematic is to use them indiscriminately as part of an "America First" policy that is negatively biased towards trade in general (and particularly free trade in general). It's also problematic if this strategy to squeeze out incrementally more gains it leads to a tit-for-tat with other nations laying their own tariffs on American goods.
As Adam Smith told us in The Wealth of Nations in 1776, specialization and the division of labor is the true source of the modern world's wealth, and the trade that has necessitated as a result of it is the reason why standards of living in America have improved so much over time. Despite it becoming somewhat of a boogey man in American politics, it turns out that trade is actually a very good thing, and while trying to solidify American self-sufficiency in certain things might be wise (a lesson we certainly learned during COVID), trying to make America self-sufficient in everything is not. We don't need to obsess about whether we make T-shirts in America anymore compared to if we buy them from Vietnam. We cannot, and will not, ever make everything ourselves as cheaply and efficiently as we can make certain things here and buy the rest from other parts of the world. There's a very good reason why most of us only have one full-time job, and not ten part-time ones that we do a couple hours a day each. If we had that many part-time jobs, we'd be absurdly inefficient. Yet taken to extremes, this is exactly what an "America First" policy more or less advocates.
The consequences will be only more drastic if anti-immigration policies are adopted in tandem. Who will there be to work all these jobs brought back home to America when the unemployment rate is already at a very low 4%, when Americans are having fewer and fewer babies, when millions of illegal immigrants are to be kicked out of the country, and with few new legal ones let in in their stead? That is a recipe for higher wage inflation, higher price inflation, higher interest rates from the Fed, and probably ultimately either recession or 1970's style stagnation. We really need to be careful with this approach.
We therefore need to balance trade with the rest of the world with jobs here at home, the same way we do when we think about whether jobs are "lost" from Michigan to Ohio, or vice-versa. Companies perform "make or buy" analyses all the time to figure out whether they should make a certain component of their final product themselves, or if someone else can make that product better and more efficiently. If America looked at trade using a national "make or buy" analysis, that balance is heavily tilted in one direction right ("Buy"). With unemployment being so low, and with real wage growth being so strong, being overly negative towards trade so that we can "make" everything is unnecessary. Being smart about this balance is the real patriotic thing to do, even if it doesn't sound as good as the "America First" rhetoric.
Though you don't often hear it, there's actually never been a better time to be alive in America, and as noted above, there's probably never been a better time to be an American worker either. Understanding why trade is good for us in the first place (because each of us specializing in something increases our society's total efficiency and output) can serve as a useful reminder that trade, and trade deficits, are not a problem so long as good paying jobs continue to be created here at home and that inflation remains subdued. That has happened for the better part of the last five decades of "globalization," despite everything you've heard to the contrary. Neglecting to give the American public the good news does no one any good but those looking to sell newspapers or to win public office. So even if it doesn't feel great right now, spread the good news, and just maybe we might be able to ensure that Americans and their highest public officers don't get too carried away with an "America First" policy that doesn't actually have America's best interests first.
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